The journey to property ownership often begins with substantial financial hurdles, particularly for first-home buyers and budding investors. One often-overlooked strategy involves utilising the 'Bank of Mum and Dad,' specifically leveraging parental home equity to gain a foothold in the property market. This approach not only facilitates entry into real estate but also allows for a strategic, temporary reliance on parental support.
Principal lending specialist Travis Carruthers from Virtus Mortgage Broking Services provides some valuable information on this topic for our readers.
Understanding Home Equity
Home equity refers to the portion of a property's value that is free from mortgage debt. For instance, if a parent's home is valued at $800,000 and they owe $200,000 on their mortgage, their equity in the property is $600,000. This equity can be used as collateral to assist children in securing a mortgage for their first home or investment property.
The Process
Parental Guarantee or Equity Release: Parents can either act as guarantors or release some of their home equity. A guarantor loan involves parents using their home as additional security, reducing the lender's risk and potentially eliminating the need for Lenders Mortgage Insurance (LMI). Alternatively, parents can access their home equity, either through refinancing or a home equity loan, to provide a direct financial contribution.
Purchasing the Property: With the additional security or funds provided by the parents, young buyers can secure a more favourable loan, often with lower interest rates and reduced upfront costs.
Building Equity: Over time, as the property appreciates and mortgage repayments reduce the principal, the young buyer builds their own equity. Strategic improvements to the property can accelerate this process, enhancing value and equity growth.
Releasing the Parental Equity: Once sufficient equity is built in the purchased property, the young buyer can refinance to release the parental guarantee or repay the equity loan. This can occur in as little as 12 months, depending on market conditions and the buyer’s financial discipline.
Benefits of This Strategy
Reduced Initial Financial Strain: Young buyers can avoid the hefty deposit requirements, making property ownership more accessible.
Lower Costs: The reduced risk to lenders can result in lower interest rates and potentially eliminate the need for LMI.
Faster Equity Growth: Leveraging parental equity can provide a head start, allowing young buyers to capitalise on market growth and property improvements sooner.
Temporary Assistance: Many fear that parents will be financially tied to their property purchase indefinitely. However, with disciplined financial management and favourable market conditions, parental involvement can be short-lived.
Key Considerations
Risk Assessment: Both parties must understand the risks. Parents' equity is at stake, and young buyers must be confident in their ability to manage the mortgage independently.
Legal and Financial Advice: It’s crucial to seek professional advice to navigate the complexities of such arrangements, ensuring all parties are protected and aware of their obligations.
Clear Communication: Open and honest discussions between parents and children about expectations, timelines, and exit strategies are essential for maintaining healthy relationships and financial stability.
In conclusion, utilising the 'Bank of Mum and Dad' through parental home equity can be a powerful tool for first-home buyers and investors. This strategy provides a viable pathway to property ownership, fostering financial independence and growth. By understanding and implementing this approach, young buyers can take a significant step towards securing their financial future.
To explore the possibility of using your parent's home equity to assist you in purchasing your first-home or investment property, reach out to Travis from Virtus on 0402 095 783.
If you're looking for a buyer’s agent or property investment adviser to assist you with purchasing a home or investment property in NSW, QLD, VIC, SA or WA, please get in touch with our team at Ready Set Buy - Property Buyer's Agents or give us a call on 1300 289 372!
Disclosure: The information contained in this blog is our personal opinion only and is not to be taken as financial advice, as we do not know your financial situation. Please speak with your accountant or any other licensed professional for specific advice based on your own personal circumstances. We will not be held liable for any losses.
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